Tribal land is for lease at Crossley and Dinah Shore in Palm Springs on Thursday, October 10, 2013. / Crystal Chatham, The Desert Sun

Written by

Barrett Newkirk

The Desert Sun

Possessory interest tax

How some jurisdictions would be hit with the end of possessory interest tax on development to Indian land, based on 2012-13 revenues:

Palm Springs Unified School District

$7,977,703

County Educational Revenue Augmentation Fund

$4,500,599

Riverside County General Fund

$3,330,427

City of Palm Springs

$2,932,407

College of the Desert

$2,193,816

Desert Water Agency

$1,573,360

Coachella Valley Water District

$1,293,129

Riverside County Office of Education

$1,014,467

Flood Control and Water Conservation District

$540,443

Desert Healthcare District

$450,694

City of Cathedral City

$329,757

Cathedral City Fire

$279,846

Coachella Valley Mosquito and Vector Control District

$221,490

Rancho Mirage Fire

$177,380

Rancho Mirage Library

$73,866

Cathedral City Community Service

$64,210

Coachella Valley Unified School District

$29,353

Desert Sands Unified Schools

$21,100

Palm Springs Public Cemetery

$21,169

Coachella Valley Resource Conservation District

$3,797

Coachella Valley Public Cemetery

$1,432

Coachella Valley Recreation and Parks

$1,164

City of Palm Desert

$948

Source: Riverside County Auditor-Controller Office

The Department of the Interior’s revised surface leasing regulations:

(a) Subject only to applicable Federal law, permanent improvements on the leased land, without regard to ownership of those improvements, are not subject to any fee, tax, assessment, levy, or other charge imposed by any State or political subdivision of a State. Improvements may be subject to taxation by the Indian tribe with jurisdiction. (b) Subject only to applicable Federal law, activities under a lease conducted on the leased premises are not subject to any fee, tax, assessment, levy, or other charge (e.g., business use, privilege, public utility, excise, gross revenue taxes) imposed by any State or political subdivision of a State. Activities may be subject to taxation by the Indian tribe with jurisdiction. (c) Subject only to applicable Federal law, the leasehold or possessory interest is not subject to any fee, tax, assessment, levy, or other charge imposed by any State or political subdivision of a State. Leasehold or possessory interests may be subject to taxation by the Indian tribe with jurisdiction.

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PALM SPRINGS — A change to a federal regulation governing surface rights on tribal land could dramatically alter local taxing authority, especially in Palm Springs where the checkerboard pattern of property holdings in western Coachella Valley frequently requires negotiated agreements between the Agua Caliente Band of Cahuilla Indians and other local governments.

According to an analysis by the Riverside County Auditor-Controller, $29 million in taxes generated on tribal lease land, including nearly $8 million to Palm Springs Unified School District, could be eliminated under changes to a type of property tax called “possessory.” Other taxes – from sales to utility – also could be impacted, diverting or eliminating tens of millions of tax revenue currently funding schools, libraries, fire departments, cities, health care districts and parks.

“It’s a complicated issue that could have far-reaching consequences,” said Jena MacLean, a partner with a Washington, D.C. law firm who specializes in Indian law and has written about the new regulation. “I still think it’s out there and it’s going to create some big problems. Whether it’s this year or next, I’m not sure.”

The $29 million possessory interest tax is paid by leaseholders on tribal lands. Riverside County collects the tax and then shares the proceeds with local jurisdictions.

Based on 2012-2013 revenue estimates, the possessory tax generated $3.3 million for Riverside County’s general fund, $4.5 million for the county’s educational augmentation fund, $3 million for the city of Palm Springs, $2.2 million for the College of the Desert. Officials at the school district and college said they needed time to research the issue before commenting on the potential impact.

“None of this is on anybody’s radar,” said Joan Boiko, spokeswoman for Palm Springs Unified.

The Desert Water Agency claims it would lose $1.6 million in possessory revenue, just a portion of the estimated $7 million the agency estimates it could lose under the new regulations. In March, DWA filed a federal lawsuit against the Interior Department over the regulations.

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The Desert Water Agency serves about 83,710 customers over a 325-square-mile area, including Palm Springs, Desert Hot Springs, parts of Cathedral City and outlying areas. Its service area overlaps with the checkerboard-pattern of sovereign land belonging to the Agua Caliente. Much of that land has been developed for commercial and residential purposes through leases with the tribe and is indistinguishable from non-tribal land.

The complaint, filed March 29 in the U.S. District Court’s Central District of California, asks the court to block enforcement of the new regulation and allow DWA to continue collecting taxes and fees from businesses, homes and other non-tribal customers located on tribal land. Along with the Interior Department, the lawsuit names as defendants the Interior Department’s Bureau of Indian Affairs, former Interior Secretary Ken Salazar and Assistant Secretary for Indian Affairs Kevin Washburn.

Central to the case is language published by the Interior Department in November 2012 stating that permanent improvements and possessory interest on “leased land, without regard to ownership of those improvements, are not subject to any fee, tax, assessment, levy, or other charge imposed by any State or political subdivision of a State.”

Possessory interest and improvements, however, “may be subject to taxation by the Indian tribe with jurisdiction.”

The rule also prohibits “any fee, tax, assessment, levy, or other charge” for activities under a lease including “business use, privilege, public utility, excise, gross revenue taxes.”

After The Desert Sun first reported on the dispute, several Riverside County residents challenged the county’s possessory tax.

In June, Norman and Rhonda Tschida asked Riverside County for a refund going back 12 years. The Tschidas live about four months a year in south Palm Springs on land that belongs to the Agua Caliente. The couple sent a letter to the Riverside County Treasurer’s Office asking for a refund on all taxes paid since April 2001. Norman Tschida, 83, estimated that would total about $36,000.

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“We’re not waiting in wild anticipation,” he said during an interview in August from his home in Portland, Ore. “We sent this in like you do when you buy a lottery ticket. You hope that something might come of it, but I don’t know where (the county) could get the funds.”

The county has received at least seven letters from people seeking refunds based on the rule change, according to a federal court filing from Desert Water Agency. The refund amounts sought total more than $166,000, although the court filing notes the amount could grow if more claims are made.

The county Assessor’s Office denied the refund requests.

“For the Assessor’s Office, we will continue to assess possessory interest as we have been until some kind of judicial ruling comes down,” County Asessor-Clerk-Recorder Larry Ward said in August. “If legally it comes down that we are not to assess it, we would quit assessing, but I don’t think we’re there yet.”

Lobbying against the tax

The Agua Caliente reservation dates back to 1876 when President Ulysses S. Grant signed an executive order setting land aside for the tribe. The reservation was later expanded to more than 32,000 acres in the checkboard pattern that falls over parts of Palm Springs, Cathedral City, Rancho Mirage and into the San Jacinto and Santa Rosa mountains.

For more than 40 years, the Agua Caliente tribe has argued that the possessory interest tax is illegal. A lawsuit the tribe filed against Riverside County over the tax ended in 1971 with a loss for the tribe when a federal court ruled the tax legitimate because it was imposed on lessees’ interest in the land and not the tribe’s land itself.

Forty year later, on Dec. 2, 2011, at the Tribal Nations Conference in Washington D.C., President Barack Obama told tribal leaders that reforming surface rights on tribal land would be an administration priority and that streamlined leasing regulations “will lead to more homes, more businesses, more renewable energy on the reservation,” according to a transcript of his comments.

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At that conference, then-Agua Caliente Chairman Richard Milanovich was one of 12 tribal leaders selected among 565 federally recognized tribes to participate in a private meeting with President Obama and then-Secretary of the Interior Ken Salazar. Also attending were Secretary of Health and Human Services Kathleen Sebelius, Secretary of Education Arne Duncan, and Associate Attorney General Thomas Perrelli, according to the White House.

A month later, Agua Caliente leaders suggested changes to surface leasing rights to the Bureau of Indian Affairs during a meeting at the Palm Springs Convention Center.

In its lawsuit against the Interior Department, Desert Water Agency has argued that the agency and other governments were not notified of the meeting and were not given sufficient opportunity to comment on the proposed regulations before they took effect.

Following the meeting at the convention center, Milanovich sent a letter to a deputy assistant secretary for Indian Affairs stating that because of the tribe’s many high-valued leases, “conservatively valued at over $250,000,000,” the proposed leasing regulations “will probably have a greater impact on the Agua Caliente Indian Reservation (ACIR) than on any other reservation in the country.”

Among the changes suggested by Milanovich was an expansion of language over taxes on improvements to Indian land to include possessory interest, which the chairman said would make regulation more equitable between California and the rest of the country.

Two months later, Milanovich, who had been battling cancer, died, ending three decades as chairman. Jeff Grubbe, vice chairman since 2007, was elected to succeed Milanovich.

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In light of the DWA lawsuit against the U.S. government, Agua Caliente leaders have so far offered no public details about how a complete repeal of the tax would work.

In a statement, Grubbe suggested the tribe would like to have a bigger role in how tax proceeds are distributed and that the Agua Caliente would continue to support government services.

“The Agua Caliente strongly believes the taxes collected within the reservation should be reinvested locally for essential services on the reservation and within the Coachella Valley for the betterment of all, including investments in public safety, education and transportation,” Grubbe said in a statement relayed through a spokeswoman.

“The Agua Caliente has a long history of collaboration with local governments for the mutual benefit of local residents, and we will continue to work toward a mutually beneficial resolution,” Grubbe said.

The Agual Caliente did not make a tribal representative available for an interview. In response to submitted questions, Kate Anderson, an Agua Caliente spokeswoman, wrote that the tax language was a concern for many tribes nationally and that the tribe doubted whether the final Interior Department regulation was in response to the Agua Caliente’s participation in the Palm Springs meeting or Milanovich’s letter.

Anderson wrote that the tribe believes the regulation applies beyond the possessory interest tax, “but we have not evaluated each tax and fee independently at this point.”

A range of reactions

So far, no other agencies have joined DWA’s lawsuit, but the outcome will be closely watched.

“We were aware that the litigation was going to be filed and there was not an immediate sense that we needed to do the same,” said Jack Porrelli, legislative analyst for the Coachella Valley Water District, which has a larger budget than DWA and stands to lose less than 1 percent of its annual operating budget if the possessory interest tax goes away.

Palm Springs City Attorney Doug Holland said he viewed the city’s roster of taxes and fees as consistent with the law because they all relate back to services, a difference from DWA’s reading of the regulation.

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Holland said it was “premature” to get into a speculative discussion about a possible bite in tax revenue. “We’re a long way from any situation where we stand to lose anything at this point,” he said.

Steve Quintanilla, an attorney for the city of Rancho Mirage, said he has not presented city officials with a legal opinion on the tax regulation, but he’s watching to see what the eventual determination is regarding what taxes or fees governments can now apply to developments on Indian land.

Besides the possessory interest tax, there are assessments to cover the costs for things ranging from major development efforts to public art, and the sales taxes collected from businesses leasing Indian land, but it remains unclear if the new regulation affects some or all of the money coming from leaseholders.

Quintanilla noted, however, that the total impact on Rancho Mirage would likely be minimal since the city has only a small amount of leased tribal land. The city and Agua Caliente have an agreement where the tribe pays an occupancy tax for its Agua Caliente Casino Resort Spa along Interstate 10. That arrangement would not be affected by a court ruling, Quintanilla said. A similar agreement exists between Palm Springs and the tribe for Spa Resort Casino in the city’s downtown.

Quintanilla suggested similar negotiations may be the answer to filling any void created when a court ruling finally brings better understanding to what revenues, if any, governments can no longer collect.

“We believe there are alternative solutions to litigation,” he said. “But since it’s now in the hopper, we’re going to sit back and wait and see.”

Worry of a land rush

The Agua Caliente, a major landholder in Palm Springs, Cathedral City and Rancho Mirage, regularly donates to desert schools and cities. Roughly half the land in Palm Springs falls within the reservation of the Agua Caliente, and much of that land has been turned into sizable retail and home developments. An end to possessory interest would, in addition to lost government revenue, create the potential for a discrepancy between developments on Indian and non-Indian land.

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Gretchen Gutierrez, CEO of the Coachella Valley Builders Association, wrote in an email the group was “closely monitoring the Desert Water lawsuit and the issues it is addressing.”

“We are remaining neutral on this issue at this time,” she wrote.

John Burge, president of the Palm Springs Regional Association of Realtors, theorized that if Indian land becomes cheaper to develop than non-Indian land, it could create a kind of land rush from eager developers. If the tribe makes its land more expensive to develop, then the rush would be toward private land.

“We’ve got a lot of theories, but nothing that we can hang our hat on,” Burge said. “If the county suddenly has no basis to come in and work, what’s going to happen? We’ve heard through the tribes that they’re working with the cities, and they say, ‘We’ll make everybody whole if this goes through.’”

Burge said he doubted the Agua Caliente would do anything to make their land less desirable.

“The last thing I want is for people to be afraid to buy Indian land just because of a rumor,” he said.